Insulet Corporation — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Insulet develops, manufactures and sells the OmniPod insulin delivery system and other diabetes-management products. The new, smaller OmniPod began U.S. sales to new customers in Q1 2013; conversion of existing U.S. customers began in Q2.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $60.1 million | $51.0 million | $117.4 million | $98.8 million |
| Gross profit | $26.8 million | $22.3 million | $52.0 million | $42.6 million |
| Gross margin | 44.7% | 43.8% | 44.3% | 43.2% |
| Operating loss | $(5.8) million | $(10.5) million | $(12.0) million | $(21.4) million |
| Net loss | $(10.5) million | $(14.5) million | $(21.2) million | $(29.3) million |
| Net loss per share | $(0.20) | $(0.30) | $(0.40) | $(0.61) |
Revenue increased 18% in Q2 and 19% in the first half, attributed to continued OmniPod adoption in the U.S. and internationally and increased sales of other diabetes supplies. Gross profit rose faster than revenue, with gross margin improving about 0.9 percentage points in Q2 and 1.1 points for the first half. Lower R&D expense—primarily reduced outside services for the new OmniPod—helped narrow operating losses. Higher interest and other expense partly offset the improvement.
- Cash flow: First-half operating cash flow was positive $3.2 million, versus cash use of $20.0 million in 2012. The 2013 result included an $8.9 million inventory reduction and a $3.3 million increase in payables and accruals; net loss remained $21.2 million.
- Liquidity: Cash and cash equivalents were $150.9 million at June 30, up from $57.3 million at year-end. Current assets were $197.1 million and current liabilities $33.9 million.
- Debt and financing: The company completed repayment or exchange of its 5.375% notes due in June 2013. Remaining 3.75% convertible notes have $143.8 million principal, mature in June 2016, and are carried at $108.7 million net of unamortized discount. A $4.3 million manufacturing-equipment capital lease was added in June, with a stated effective rate of 17%. January’s public stock offering generated $92.8 million net proceeds.
Changes, outlook and notable items
- Net loss narrowed year over year, while the company continued to report losses and an accumulated deficit of $502.7 million.
- Management expects 2013 revenue to increase, but gives no specific numerical forecast. Growth depends on customer conversion to the new OmniPod, new customer acquisition, adequate production volumes, international expansion and reimbursement conditions.
- Management expects near-term losses to continue. It expects 2013 R&D spending to decrease slightly versus 2012, while general and administrative and sales and marketing expenses are expected to increase.
- Neighborhood Diabetes was not awarded a contract in the CMS national mail-order competitive bidding program. Effective July 1, 2013, it became ineligible to supply certain mail-order diabetes testing products, including strips and lancets, to Medicare beneficiaries. Management reported no impairment of acquired intangible assets following its analysis.
- Three patent lawsuits were disclosed: claims by Becton, Dickinson and Medtronic, and a 2013 claim by Rydex. Insulet disputes infringement and does not believe the matters create material financial exposure, but outcomes are uncertain; the Medtronic patents concern technology material to the business.
- Operational risks include dependence on Flextronics for complete OmniPods and concentration of manufacturing capacity in China and inventory in Massachusetts. The company also cites reimbursement, supplier, product liability, competition, regulatory and financing risks.
- Management believes cash, together with expected product-sale cash generation, will cover projected operating and debt-service needs for at least 12 months. There were no material changes to previously disclosed risk factors; disclosure controls were assessed as effective.
Investor verification points
- Track new-system customer conversion, adoption, production volumes and whether improved gross margin is sustained.
- Assess operating cash generation excluding the inventory drawdown and other working-capital movements; monitor continuing losses and cash needs.
- Review the terms and maturity obligations of the $143.8 million convertible notes and the cost of the new capital lease.
- Quantify the financial and customer impact of losing Medicare mail-order eligibility for specified testing supplies.
- Monitor outcomes and potential injunction or damages exposure in the patent litigation, particularly the Medtronic case.
- Evaluate dilution from the January stock offering and note-related share issuances; 54.3 million shares were outstanding at June 30.